Is Buying a Home Stupid?

Is the era of aspiring to own a home at an end?

James Altucher's recent blog post "Why I Am Never Going to Own a Home Again" is very much a personal account (note the "I" in the title). And frankly, I agree with him on a few of his major points. But I also think he manages to botch the investment thesis for owning a home.

In the wake of the housing meltdown it's not all that surprising to hear talk about never wanting to own a home -- or own one again, as with Altucher. With a front seat in one of the country's ground zeroes in Las Vegas, I've seen more than my fair share of real estate nightmares. However, I don't think buying a home needs to be completely sworn off any more than buying stocks needed to be completely sworn off in the wake of the dot-com crash.

The "real" returnsIn his post, Altucher highlights the fact that as an investment, housing hasn't had a particularly impressive history of returns. He points to data -- I'm assuming from Robert Shiller -- that shows that housing prices have risen, on average, 0.4% between 1890 and 2004.

If we stretch that timeline out to 2010, it actually looks worse -- more like 0.2%. But those are real returns, or the total nominal return less inflation. Now I'm not looking to get into an ideological debate over whether it makes more sense to talk about real or nominal returns, but the fact is that when people talk about investment returns they are almost always use nominal returns.

The average annual nominal return on housing has been 3% between 1890 and 2010. That still isn't great, but using the real return smacks a bit of an optical trick to prove a point.

What about returns plus leverage?Altucher bemoans the fact that homeowners generally have to use a lot of leverage to buy their home. There are two sides to that coin, though. The fact is that there are few investment opportunities out there where small-timers can use as much leverage as they can with the purchase of a home. Granted, taking that to an extreme during the early years of the millennium is what got us into this mess, but there's a yawning gulf between a conventional 30-year, fixed-rate mortgage with 20% down and a five-year, interest-only, negative-amortization loan.

And looking back to the first point, while a 3% annual return may look meager, when you're leveraged 5-to-1, your returns are significantly magnified.

The other returnsAmong the financial considerations, Altucher also doesn't mention the fact that a homeowner gets implied returns by nature of the fact that they're not paying rent. It's as if you've bought a home to rent out and you're the renter.

It's this point, though, that really gets to the crux of the issue. Just like any other asset, a home isn't a good purchase no matter what. Back in 2000, most investors threw valuations out the window and were willing to pay whatever for stocks like Cisco(Nasdaq: CSCO) and Microsoft(Nasdaq: MSFT). Today, that view has broken down to some extent and investors are skeptical of stocks like Cisco and Microsoft despite forward earnings multiples of 10.5 and 9.7, respectively.

The financial case for buying a home has taken a beating because the case has been simply hasn't been there for quite a while. In an offline conversation, my fellow Fool Morgan Housel scoffed at the idea of giving up his rental arrangement and buying a home largely from a financial perspective. Of course, Morgan lives in Seattle, where home-price-to-rental rates are among the highest in the country, meaning that it's still financially advantageous to rent rather than buy. In fact, despite the housing-price free fall, the price-to-rent ratio for the 54 largest U.S. metro areas was still well above its longer-term average as of 2010.

In other areas though -- bedraggled Las Vegas, for instance -- the math has changed considerably. Price-to-rent has fallen to among the lowest in the country, and new homes from builders like KB Home(NYSE: KBH), Lennar(NYSE: LEN), and Beazer Homes(NYSE: BZH) are selling in the $100-per-square-foot range.

In short, it's not that buying a home is always a poor financial decision, but rather that buying a home at an inflated price is a poor financial decision.

I'm with ya, JamesTo be fair, Altucher notes at the very end of his post that he thinks "housing is a great investment right now" but that he doesn't like to talk about investing on the blog. But that's after he's already spent much of the post dismissing the financial considerations for buying a house.

I'm fully on board with Altucher on many of his non-financial points, though. A house is a very illiquid investment and will kill the diversification efforts for most individual investors. Owning a home also makes you highly immobile, and while that may not have been as big of a deal in the past, the nature of the 21st-century job market makes it more difficult to fully commit yourself to a geographical location. Not to mention the fact that many -- this Fool included -- simply don't want to be locked down. And of course there's always Altucher's piece de resistance:

I don't like [my cash] all tied up in one illiquid investment. I want to fill a bathtub with all the dollar bills I would've used as a downpayment on a house. I want to bathe in that bathtub. I'm going to do that later today in fact.